Sachin Bhatia says it's time for charities to reconsider their investment strategies

Low returns on some forms of investment have left trustees unsure about where to go next

Sachin Bhatia
Sachin Bhatia

Many charities are seeking long-term, reliable, high-income streams from their investment portfolios to fund their activities. Others have assets that they wish to invest over the long term to deliver capital growth.

For income seekers, very low returns on bonds and cash deposits have left many trustees scratching their heads and looking for alternative income investments. On the other hand, charities seeking capital growth will have done very well from investment in equities in recent years. But with many markets at or near all-time highs, does the risk of equity volatility now outweigh the benefits? Is now the time for charity trustees to rethink their investment strategies and look at alternative asset classes?

Many investment options are available to charities, but the starting point has to be for trustees to define exactly what it is they require in terms of income or capital growth from their investments and then set a strategy to meet these needs. The mix of assets could then include cash, equities, bonds, infrastructure, private equity, property, commodities, hedge funds or funds of hedge funds.

Infrastructure, for example, is an interesting investment option for charities that are seeking income. Many trustees will automatically think infrastructure investment means long-term, capital-intensive projects such as road and rail infrastructure, which are suitable only for the largest investors. In reality, many smaller "sub-mega" infrastructure investments are now available and charities would do well to consider them. These invest in real assets with long-term contractual income streams that can often be index-linked. Examples include investment opportunities in the power supply sector, where the government or large utility businesses are the counterparties that pay the index-linked income. These include solar and anaerobic digestion energy generation as well as electricity grid support projects that regulate the functioning of the national power supply. These sub-mega infrastructure investments have historically delivered returns of between 7 and 9 per cent in current market conditions.

Private equity is another asset class that many trustees might think of as being suitable only for the largest of institutional investors. In reality, not all private equity investments are massive management buy-outs or public-to-private deals. The UK has many extraordinary entrepreneurial businesses in the technology, healthcare and communications sectors. A number of these will go on to be the new Lovefilm or Shazam of their day, delivering high returns to investors. For charities that are seeking long term capital growth, an investment in a professionally managed and well-diversified portfolio of high-growth, unquoted businesses could offer a real alternative to traditional asset classes.

Of course other, far more esoteric assets are available, such as synthetic structured products, derivative instruments or even distressed or emerging markets debt. But these carry risks or complexities that make them unsuitable for all but the most sophisticated of charity investors. Here trustees would be wise to remember Warren Buffet’s sage advice: "Never invest in a business you cannot understand."

In these days of low interest rates and potentially fragile equity markets, traditional bond and equity asset allocation is no longer going to meet the needs of all charities. Trustees should take the opportunity to look beyond the ordinary and consider some alternatives. By adding a small investment in alternative asset classes alongside their traditional portfolios, trustees might find they reduce the volatility, improve the returns and increase the yield on their investments.

Sachin Bhatia handles institutional investor relations at Oxford Capital

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